Chinese New Year is always a time when I put on weight. Too much good food around and it’s the time when even my health conscious parents will lay aside their usual health concerns to actively encourage me to eat. As a result, I always find that I will put on weight after Chinese New Year.
Besides adding on weight, thus far, markets have also been going from strength to strength. It has been a great start so far in 2012 for markets. Many Asian markets are up 6 to 8% since the start of the year. US markets have also moved up 4.5%. Though concerns remain, there is definitely a subsiding of worries over the state of the global economy. European debt concerns, while still present, have diminished somewhat to the background. We all know Europe is not out of the woods yet, and it’s not going to be something that will be solved any time soon. However, the sense that there is a major crisis brewing in Europe has faded.
I shifted to a major overweight position in equities since the third quarter last year and I have not shifted back from that since. The falls in markets last year has just made equities look cheap no matter how you look at it. And notwithstanding cheap valuations, earnings have also remained a lot more resilient than what people would expect. Based on the pessimism pervading last year, you would have thought that most companies were facing a sea of red ink and losses. That simply hasn’t been true. Even banks, which arguably have the most to lose and should be the worst hit due to the European debt crisis, are still largely in the black.
I am always a believer that eventually, strong fundamentals will prevail. Some shorter term concerns may temporarily bring down markets over a few months, or even a year, but if companies continue to bring in profits, and are still priced cheaply, then a rally in markets will definitely take place. It is just a matter of time. A lot of things are in place for that rally already.
Firstly, we are starting off the year on a positive note. Markets have started the year on a rising trend, and that is always good because it encourages people to come back and relook at markets. Secondly, valuations remain cheap. We are not talking about a 50% rebound that happened in one month. At this level of markets, there remain a lot of upside potential based on the low valuations of most markets around the world.
Thirdly, the US economy may surprise a lot of investors this year. The property market in the US has been in the doldrums for 5 years now, and is due for a rebound. A rebound in property prices will have a big positive impact on the US economy, and will also help to boost the US stock market accordingly. This is why I am looking to actively add more to my US positions in coming weeks and months. In China, we see a loosening of policy, which will again have a large positive effect on markets in the region.
Fourthly, earnings in Asia, as well as globally has continued to hold steady. Corporate health in the US, even in Europe, and in Asia as well is a very different picture compared to the fiscal health of governments in Europe. Ultimately, it is corporate earnings that drive markets. If a company keeps on increasing its profits, or at the very least, continues to able to keep its profits steady, it’s a matter of time before investors reward the company by pricing its market value higher appropriately.
Finally, it is also a psychological thing. We are starting a fresh new year, and so it is a good time for investors to lay aside old concerns and look at the market with a fresh pair of eyes. Lay down the troubles of 2011, and look towards a better 2012. With time, eventually all problems start to be less alarming. 2011 had many in a sense of crisis. Many investors felt as if a blow up in markets could happen at any time. That kind of crisis mode can only be sustained for a certain period of time before fear subsides. It’s like the Japan nuclear crisis. You could worry for a while that there could be a devastating nuclear explosion in Japan. But after a few days, a few weeks, if not months, you simply won’t be thinking quite so much about that anymore because it hasn’t happened yet, and there will be other more immediate issues that warrant your attention.
It’s a good time now to look to adding to existing investments or starting new ones. We can’t always be worrying about whether the sky is falling, and in fact, it hasn’t fallen at all. Markets have actually been rising steadily since the start of the year. It is also a very interesting point that last year, despite all the hoo-ha about Europe, the European markets actually performed better than Asian markets. If the Europeans themselves (as evidenced by their own market performance) are not panicking, then all the more we shouldn’t lose our nerves either.
I am very bullish for 2012, and will be looking to add to my positions in equities actively this year. I think markets will surprise many investors with their strength this year. The key thing is to remain disciplined. Have a diversified global portfolio that includes bond funds as well as equity funds and you will be able to invest with much more confidence. Markets are still quite cheap now, but they will not always remain cheap. So, it’s best to start positioning one’s portfolio now. Don’t wait for good news to come in, by that time, it is usually too late!
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